INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 19, Problem 4CP
Summary Introduction
(A)
Adequate information:
| Components | Quick brush company(in $) | Smile white corporation (in $) |
| Net Profit | 445 | 4850 |
| Pretax Profit | 660 | 7350 |
| EBIT | 660 | 7700 |
| Sales | 7760 | 119200 |
| Assets | 5470 | 33600 |
| Equity | 3720 | 22700 |
| Dividend per share | 0 | 1.72 |
| Earnings Per Share(EPS) | 1.18 | 2.62 |
Requirement 1: To calculate and analyze five components that determine
Introduction:
Return on Equity measures the financial performance of the company by focusing only on the profitability of equity investments. It is expressed as:
Though in Du-pont system, the return on equity is decomposed into five components. Thus decomposed return on equity is calculated as:
= Tax burden X Interest burden X Margin X Turnover X Leverage
Expert Solution
Explanation of Solution
Calculation of Return on Equity using five components for Quick Brush company and smile white corporation.
Conclusion
Though the Margin for profits in Quick Brush Company (8.5%) is more than Smile White Corporation(6.4%), but the Return on equity is less in Quick brush company(11.87%) as compared to Smile white corporation(21.12%). Thus Quick Brush company is not profitable from shareholders point. Also the Turnover of assets in Quick brush is also less (1.41) as compared to Smile White Corporation which shows that Quick brush company earns less from its total assets as compared to Smile white corporation.
Summary Introduction
Requirement 2: To calculate and analyze ROE and plowback ratios that determine sustainable growth.
Introduction:
The sustainable growth is the maximum growth rate that a firm can sustain without having to lookout for outside finance. It is multiple of return on equity and retention ratio. It is calculated as:
Sustainable Growth
Expert Solution
Explanation of Solution
Calculation of Sustainable growth
Conclusion
Since the sustainable growth rate shows the firm's dependency on dividend policy and profitability, thus here the analyst- Janet Ludlow is confident on both the firm's sustainable growth rate.
Summary Introduction
(B)
To explain that the Quick Brush Company is having average annual Earning per share growth rate of 40% in last two years though the Return on Equity is declining in two years.
Introduction:
Earning per share is the portion of a firm's profit allocated to each share of common stock. A firm with high Earning per share ratio means that it is capable of generating high dividends for investors of common stock or it may plow back funds for business growth.
Return on Equity measures the financial performance of the company by focussing only on the profitability of equity investments. It is expressed as:
Expert Solution
Answer to Problem 4CP
Quick Brush Company has growing Earning Per Share but declining ROE because it has increased its book value per share over the period of two years.
Explanation of Solution
Quick Brush Company has a declining Return On Equity because it had
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
You are analyzing two companies that manufacture electronic toys-Like Games Inc. and Our Play Inc. Like Games was launched eight years ago,
whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market
share with sales of $100,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry
competitors was $255,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year.
You've collected data from the companies' financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.)
Data Collected (in dollars)
Like Games Our Play
Industry Average
Accounts receivable
2,700
3,900
3,850
Net fixed assets
55,000
80,000
216,750
Total assets
95,000
125,000
234,600
Using this information, complete the following statements to include in your analysis.
1. A days of…
You are analyzing two companies that manufacture electronic toys-Like Games Inc. and Our Play Inc. Like Games was launched eight years ago,
whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market
share with sales of $100,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry
competitors was $255,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year.
You've collected data from the companies' financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.)
Like Games Our Play
Data Collected (in dollars)
Industry Average
Accounts receivable
2,700
3,900
3,850
Net fixed assets
55,000
80,000
216,750
Total assets
95,000
125,000
234,600
Using this information, complete the following statements to include in your analysis.
1. A days of…
The Protek Company has been growing very fast, but profitability has declined from 11.85% to 2.36% in just two years. Costs have increased faster than sales and expenses are out of control. The Board of Directors has appointed Bob Smith to come up with some recommendations that are likely to help get the situation under control. He has made the following suggestions, but has hired you to actually put the numbers into proforma statements to present to the Board at their next meeting.
Income Statement
The company will slow down the growth of sales to 15% for the next year (20X4). Bob does not see any easy fixes to the cost of good sold situation, so those will go up 15% in line with sales, leading to the same gross margin percent as this past year.
Bob has decided that the budgets for the Marketing and Research and Development departments should be exactly the same dollar amount as in 20X3. He feels that imposing that particular discipline to the Marketing Department will be good for…
Chapter 19 Solutions
INVESTMENTS(LL)W/CONNECT
Ch. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - Prob. 5PSCh. 19 - Prob. 6PSCh. 19 - Prob. 7PSCh. 19 - Prob. 8PSCh. 19 - Prob. 9PSCh. 19 - Prob. 10PS
Ch. 19 - Prob. 11PSCh. 19 - Prob. 12PSCh. 19 - Prob. 13PSCh. 19 - Prob. 14PSCh. 19 - Prob. 15PSCh. 19 - Prob. 16PSCh. 19 - Prob. 1CPCh. 19 - Prob. 2CPCh. 19 - Prob. 3CPCh. 19 - Prob. 4CPCh. 19 - Prob. 5CPCh. 19 - Prob. 6CPCh. 19 - Prob. 7CPCh. 19 - Prob. 8CPCh. 19 - Prob. 9CPCh. 19 - Prob. 10CPCh. 19 - Prob. 11CPCh. 19 - Prob. 12CPCh. 19 - Prob. 13CP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Adams Furniture has a quick ratio of 2.00x, $37,575 in cash, $20,875 in accounts receivable, some inventory, total current assets of $83,500, and total current liabilities of $29,225. The company reported annual sales of $100,000 in the most recent annual report. Over the past year, how often did Adams Furniture sell and replace its inventory? O 2.86x O 4.39x O 8.01x O 3.99x The inventory turnover ratio across companies in the furniture industry is 4.389x. Based on this information, which of the following statements is true for Adams Furniture? O Adams Furniture is holding less inventory per dollar of sales compared with the industry average. O Adams Furniture is holding more inventory per dollar of sales compared with the industry average. You are analyzing two companies that manufacture electronic toys-Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However,…arrow_forwardYou are analyzing two companies that manufacture electronic toys—Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $100,000 each. You’ve collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $255,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You’ve collected data from the companies’ financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.) Data Collected (in dollars) Like Games Our Play Industry Average Accounts receivable 2,700 3,900 3,850 Net fixed assets 55,000 80,000 216,750 Total assets 95,000 125,000 234,600 Using this information, complete the following statements to include in your…arrow_forwardBannister Company, an electronics firm, buys circuit boards and manually inserts various electronic devices into the printed circuit board. Bannister sells its products to original equipment manufacturers. Profits for the last two years have been less than expected. Mandy Confer, owner of Bannister, was convinced that her firm needed to adopt a revenue growth and cost reduction strategy to increase overall profits. After a careful review of her firms condition, Mandy realized that the main obstacle for increasing revenues and reducing costs was the high defect rate of her products (a 6 percent reject rate). She was certain that revenues would grow if the defect rate was reduced dramatically. Costs would also decline as there would be fewer rejects and less rework. By decreasing the defect rate, customer satisfaction would increase, causing, in turn, an increase in market share. Mandy also felt that the following actions were needed to help ensure the success of the revenue growth and cost reduction strategy: a. Improve the soldering capabilities by sending employees to an outside course. b. Redesign the insertion process to eliminate some of the common mistakes. c. Improve the procurement process by selecting suppliers that provide higher-quality circuit boards. Required: 1. State the revenue growth and cost reduction strategy using a series of cause-and-effect relationships expressed as if-then statements. 2. Illustrate the strategy using a strategy map. 3. Explain how the revenue growth strategy can be tested. In your explanation, discuss the role of lead and lag measures, targets, and double-loop feedback.arrow_forward
- You are analyzing two companies that manufacture electronic toys-Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $200,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $510,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies' financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.) Accounts receivable Net fixed assets Total assets Data Collected (in dollars) Like Games Our Play Industry Average 5,400 7,800 7,700 110,000 160,000 433,500 190,000 250,000 469,200 Using this information, complete the following statements to include in your analysis. 1. Our Play…arrow_forwardThe new chief executive officer (CEO) of Richard Manufacturing has asked for a variety of information about the operations of the firm from last year. The CEO is given the following information, but with some data missing: (Click the icon to view the variety of operations information.) Read the requirements, Requirement 1. Find (a) total sales revenue, (b) selling price, (c) rate of return on investment, and (d) markup percentage on full cost for this product. (a) The total sales revenue is (Round your answer to the nearest cent.) (b) The selling price per unit is (Round the retum on investment to the nearest whole percent, X%.) (c) The rate of return on investment is (d) Calculate the markup percentage on full cost for this product. (Round your intermediary calculations to the nearest cent and the markup to the nearest hundredth percent XXX%) The markup percentage on full cost for this product is Requirement 2. The new CEO has a plan to reduce fixed costs by $200,000 and variable…arrow_forwardYou are analyzing two companies that manufacture electronic toys—Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $200,000 each. You’ve collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $510,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You’ve collected data from the companies’ financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.) Data Collected (in dollars) Like Games Our Play Industry Average Accounts receivable 5,400 7,800 7,700 Net fixed assets 110,000 160,000 433,500 Total assets 190,000 250,000 469,200 Using this information, complete the following statements to include in your…arrow_forward
- Lisa currently manages the polished chrome division of Whispering Broadway, a business that specializes in ceiling light fixtures. Its performance has been stable for the past few years. However, the crystal division has been losing market share, while the rustic iron and chrome divisions have been growing. For the most part, executives feel that these changes are a result of customer preferences and current trends versus the quality or prices of their products. While they expect preferences to return to the crystal product line in the next five years, a short-term decision must be made now. Budgeted financial information for Whispering Broadway's upcoming fiscal year is presented below for each division Sales Variable costs Contribution margin Fixed costs Operating income Chrome $1,230,000 753,000 477,000 236.000 Crystal $424.000 298.000 126.000 236,000 $241.000 $(110,000) Iron $752,000 313,000 All foxed costs are currently assigned evenly to all divisions. 439,000 236,000 $203.000arrow_forwardYou are analyzing two companies that manufacture electronic toys-Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $300,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $765,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies' financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.) Accounts receivable Net fixed assets Total assets Data Collected (in dollars) Like Games Our Play Industry Average 8,100 11,700 11,550 165,000 240,000 650,250 285,000 375,000 703,800 Using this information, complete the following statements to include in your analysis. 1. Our Play…arrow_forwardYou are analyzing two companies that manufacture electronic toys—Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $800,000 each. You’ve collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $2,040,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You’ve collected data from the companies’ financial statements. This information is listed as follows: (Note: Assume there are 365 days in a year.) Data Collected (in dollars) Like Games Our Play Industry Average Accounts receivable 21,600 31,200 30,800 Net fixed assets 440,000 640,000 1,734,000 Total assets 760,000 1,000,000 1,876,800 Using this information, complete the following statements to include in…arrow_forward
- Tom and Jerry are both managers of sales teams at Flint Corp., a furniture company whose most popular item is a tweed couch. Tom and Jerry are very competitive and each attempt to outperform one another every year. Currently, Tom's department has better metrics, which has resulted in larger bonuses for Tom and his team. Flint Corp. evaluates both departments based upon each team's respective return on investment and economic value added. The departments reported the following financial data during the most recent year: Operating Income Sales Average Operating Assets Total Assets Current Liabilities Jerry $125,613 $2,791,400 $953,900 $1,103,880 $208,630 Tom $183,995 $3,679,900 $1,321,120 $1,521,480 $296,860 It should be noted that Flint uses average operating assets as its definition of investment, and it has a minimum required rate of return of 8.72% and a tax rate of 22%. Flint has used a variety of ways to acquire capital and has the current makeup: proportion of equity is 38%, the…arrow_forward[The following information applies to the questions displayed below.] Mears and Company has been operating for five years as an electronics component manufacturer specializing in cellular phone components. During this period, it has experienced rapid growth in sales revenue and in inventory. Mr. Mears and his associates have hired you as Mears's first corporate controller. You have put into place new purchasing and manufacturing procedures that are expected to reduce inventories by approximately one-third by year-end. You have gathered the following data related to the changes: Inventory Cost of goods sold (dollars in thousands) Beginning of Year $585,700 End of Year (projected) $392,310 Current Year (projected) $7,018,984 P7-7 Part 2 2. What is the effect of the projected change in the inventory balance on cash flow from operating activities for the year? Effect of change in inventoryarrow_forward[The following information applies to the questions displayed below.] Mears and Company has been operating for five years as an electronics component manufacturer specializing in cellular phone components. During this period, it has experienced rapid growth in sales revenue and in inventory. Mr. Mears and his associates have hired you as Mears's first corporate controller. You have put into place new purchasing and manufacturing procedures that are expected to reduce inventories by approximately one-third by year-end. You have gathered the following data related to the changes: Inventory (dollars in thousands) Beginning of Year $585,700 End of Year (projected) $392,310 Current Year Cost of goods sold P7-7 Part 1 (projected) $7,018,984 Required: 1. Compute the inventory turnover ratio based on two different assumptions: Note: Round your answers to 1 decimal place. a. Those presented in the above table (a decrease in the balance in inventory). b. No change from the beginning-of-the-year…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
GE McKinsey Matrix for SBU Strategies; Author: Wolters World;https://www.youtube.com/watch?v=FffD1Ze76JQ;License: Standard Youtube License